Wild fluctuations
in China’s stock market, bonds, property and now commodities stem from a
deliberate official policy to delay the pain of dealing with high government
debt and economic inefficiencies
Xi Jinping in
full control? What an anonymous interview tells you about power struggle in
China
China is a good example of
how an activist monetary policy can ferment bubbles, ruin the health of a
financial system, economic reforms and, eventually, economic growth. Since
2004, China has run a gigantic monetary bubble that has corrupted virtually
every corner of the economy.
The depreciating pressure on
the renminbi put a stop to wholesale bubble-making. But, as soon as the
pressure eased when the US Federal Reserve changed its tune on when to raise
interest rates, it was back to the races again. This time, it was in commodity
futures.
The mystery
deepens: China’s slowing economy and gravity-defying commodities futures rally
A couple of months ago,
China’s commodity market went totally crazy, fast. It was like a long-term
addict bingeing for the very last time. Transaction volumes in steel futures
exceeded those for the A-share stock market. One day’s trading volume was
greater than the total physical production in a year.
The average holding period
was rumoured to be four hours. When the market was surging, most pundits
interpreted it as a leading indicator of economic recovery. Now, the market is
tumbling. The spin is that it was pointing in the right direction, just
overdone.
China steel
futures fall most in seven years as rout extends
In my view, it was pure
mania. China’s steel production fell by 3.2 per cent in the first quarter,
following a 2.2 per cent decline last year. The property market, the main
customer, has been a huge bubble. Its bursting is just beginning. Major
bankruptcies are yet to come. It is basically a joke to say that steel demand
has bottomed out. It doesn’t bottom out until banks come clean on their bad
loans and close down zombie developers.
Bubbles occur in China
because the financial system subsidises speculation. This one is no exception.
Any futures market is highly leveraged. When the deposit is 5 per cent of face
value, that is 20 times leverage. But, who is supplying the credit? In China,
almost all financial institutions are government-owned.
When the price could move
more than the deposit requirement in one day, the credit providers are
subsidising speculation big time. The people at these institutions just want to
book short-term profits to grease their bonuses. They couldn’t care less about
future bad loans.
End of the
road for China’s property policy easing?
In the past two years, we
have witnessed the crazy subprime debt-fuelled stock market bubble. The
subprime debt sloshed into the corporate bond market to prop up demand for
bonds from technically bankrupt local governments and companies. A subprime
frenzy for down payments in the property market followed. Now there is this
commodity mess. Were all these crazy Ponzi schemes random occurrences, as they
were nobody’s fault?
Were all these crazy Ponzi schemes random occurrences, as
they were nobody’s fault?
In my view, these bizarre
frenzies are the consequence of financial regulators and the monetary authority
pumping in liquidity to prop up money-losing industries and local governments.
All such bubbles have one thing in common: they bring money to money-losing
industries and government coffers. The bubbles may be nuts but they bring what
the policymakers want. When all industries suffer from overcapacity and the
property market faces an overhang close to 100 per cent of gross domestic
product, the credit demand for real investment is nil.
So, when the authorities
talk about using monetary policy to help the economy, they are really
fermenting bubbles, hoping that some money will go into loss-making industries
and keep them afloat. That is why I believe the bubbles are policy-induced and
on purpose.
China’s
economy is headed for an L-shaped future, property boss Ronnie Chan says
China’s financial system,
especially its monetary policy, is mainly responsible for leading the country
down the path of mushrooming leverage and crazy bubbles. The view on staving
off the collapse is to ferment some more. The game is up only when the pressure
on the exchange rate becomes persistent, which would put a stop to the crazy
liquidity policy.
Are we doomed
to be trapped in a bubble economy?
China is large. When it
weakens, there will be a response from the global economy. The Fed has found it
difficult to raise interest rates because China’s impact on the global economy
is so large. This dance between China and the US could go on for a while. Some
may argue that it could go on forever, that is, one bubble after another, ad
infinitum.
The trouble with bubbles is
that every one increases leverage. Eventually, the leverage is so high that interest
rates must be zero to stop interest payments from crushing debtors. When that
occurs, savers will take out their money and the whole edifice will fall.
Why US Fed’s
latest stance on interest rate is good news for China
Some may argue that this day
of reckoning is very far away; things can carry on like this for years.
Unfortunately, political changes are coming soon to upend the bubble path. All
US presidential contenders are for raising the minimum wage and increasing
trade barriers. One is for limiting immigration. These three policy elements
are a consistent package for addressing the escalating wealth and income inequality
in the US. But, they will lead to inflation and rising interest rates. When the
US interest rate rises to 5 per cent, the global dollar balance sheet has to
shrink. Deleveraging pressure in emerging economies is already rising. The new
development will turn it into a financial crisis.
China is riding the tiger of
debt and bubbles. If it gets off, there will be a lot of pain. But, if external
forces were to throw it off unexpectedly, the consequences would be far worse.
Is anyone listening?
Andy Xie is an independent economist
No comments:
Post a Comment